business successionhttp://www.wisebread.com/taxonomy/term/8679/all
en-USGiving Away Your Business? Now’s the Time to Do It!http://www.wisebread.com/small-business/giving-away-your-business-now-s-the-time-to-do-it
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<a href="http://www.openforum.com/articles/the-business-advantage-of-dying-before-2013" target="_blank">http://www.openforum.com/articles/the-business-advantage-of-dying-before-2013</a> </div>
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<p>Many people plan to grow their businesses so they can sell them, collect a tidy sum, and retire comfortably. But with family businesses, which represent 80% of all businesses in the U.S., the goal for many owners is to pass on a successful operation to the next generation. Gifting is a good strategy if you have sufficient funds to meet your retirement needs and want to nail down your succession plans now. The time is right to act on transferring business interests now.</p>
<h3>Federal Gift Tax Rules Are Favorable</h3>
<p>There&rsquo;s no income tax when you receive property as a gift, but the person giving the assets away (called &ldquo;the donor&rdquo;) may owe a gift tax, which is a separate tax from the income tax. <a href="http://www.opencongress.org/bill/111-h4853/show" target="_blank">Legislation passed late last year</a> created very favorable federal gift tax rules for 2011 and 2012.</p>
<p>Every person can transfer up to <a href="http://www.irs.gov/businesses/small/article/0,,id=164872,00.html" target="_blank">$5 million in a lifetime</a>. While using this exemption from gift tax reduces what you can pass tax free at death, there is probably little reason to wait. Delaying a transfer with the expectation of leaving your business to family members at death may prove costly if you don&rsquo;t die by the end of next year and the estate tax exemption amount declines after 2012.</p>
<p>No one knows what will happen after 2012 to the estate or gift tax exemption. The exemption amount could return to the former limit of $1 million, or to something less than the current $5 million amount.</p>
<h3>Business Values Are Low</h3>
<p>Bad economic times, which have caused low business values, have a tax advantage. Lower values mean that a greater interest can be transferred without tax cost than when values are high.</p>
<p>For example, you want to transfer 10% of your interest in a privately-owned business to your three adult children, each of whom is married. Your interest is worth $2 million. The gift is only $200,000.</p>
<p>In figuring what portion, if any, of the gift is taxable, you can apply what is referred to as &ldquo;valuation discounts&rdquo; for lack of marketability and minority interests. Because the interests you&rsquo;re giving cannot be readily sold (it&rsquo;s not like publicly held stock) and the children will have only a minority ownership interest, the true value of their gift is less than $200,000. There is no set formula for the amount of the discounts; they can range in total from 10% to 40%. Assuming a 25% discount, the value of the gift is only $150,000.</p>
<p><b><i>Caution: </i></b>Prior to the legislation last year, there had been considerable talk in Congress of eliminating valuation discounts; as yet they are still permitted, but could be changed after 2012.</p>
<p>In addition to the lifetime exemption, each person has an annual gift tax exclusion. The exclusion for 2011 is $13,000. This applies to each gift you make to another person. If you&rsquo;re married and your spouse joins in the gift, you can double the tax-free gift without even resorting to the exemption. Thus, continuing with the same example, you can give each child and each child&rsquo;s spouse (a total of six) a gift this year and one next year. All of these transfers will be made tax free by the annual gift tax exclusion (each gift this year and next year is valued at $12,500, which is less than the annual exclusion). The transfer of 10% of your business doesn&rsquo;t cost you any tax.</p>
<p>Note: If you are in Connecticut or Tennessee, there&rsquo;s a gift tax at the state level.</p>
<h3>Waiting Invites Trouble</h3>
<p>Unfortunately, many senior family members don&rsquo;t make succession plans. When they die, this can:</p>
<ul type="disc">
<li><b>Create chaos for heirs</b>. Say all your children inherit equally, but only one is working in the business. How will this affect the child in the business when it comes to decision-making?</li>
<li><b>Cost estate taxes that could have been avoided</b>. While the exemption for federal estate tax is $5 million through 2012, it is considerably lower &ndash; $1 million &ndash; in a number of states, including Massachusetts, New Jersey, and New York. Planning ahead can minimize the tax cost.</li>
<li><b>Devastate the business</b>. If you die wealthy (don&rsquo;t forget that your estate includes not only your interest in the business, but also your home, your 401(k)s and IRAs, and other property), your estate may owe estate tax nine months after your death. Unless there are liquid assets, some or all of the business may have to be sold, probably at fire-sale prices, in order to raise cash for the tax bill.</li>
</ul>
<h3>Bottom Line</h3>
<p>Get started on your plans if you have not yet done so. It can take time to develop a plan that works best for you, your business, and your family. It&rsquo;s a good idea to meet with an estate planning advisor who can help you craft a succession plan that fits neatly within your financial and estate plans. And you&rsquo;ll probably need to obtain a business appraisal to accurately value the business interests that are being given away.</p>
<br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/barbara-weltman">Barbara Weltman</a> of <a href="http://www.wisebread.com/small-business/giving-away-your-business-now-s-the-time-to-do-it">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1">
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</div> </div><br/></br>EntrepreneurshipSmall Business Resource Centerbusiness successionbusiness valuationgift taxinheritancesmall businessSun, 19 Jun 2011 20:02:24 +0000Barbara Weltman571061 at http://www.wisebread.comBusiness Succession Planning Part 3: Using Disability Insurance to Protect your Business Interesthttp://www.wisebread.com/business-succession-planning-part-3-using-disability-insurance-to-protect-your-business-interest
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<p class="MsoPlainText"><span> </span><span>In my previous posts on this topic, I delved into the world of <a target="_blank" href="/business-succession-planning-part-1-what-a-shareholders-agreement-means-to-you">Buy-Sell Agreements</a>, and how to use <a target="_blank" href="/business-succession-planning-part-2-how-life-insurance-will-insure-the-life-of-your-business">Life Insurance</a> to fund these agreements and insure valuable assets like key employees. </span></p>
<p class="MsoPlainText"><span>But there is a risk much more prevalent than death which also needs attention on the part of business owners and partners: the risk of Disability. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>In our working lives, we are considerably more likely to become ill or injured such that we cannot work than we are to get proverbially hit by a bus and killed. So it can be argued that even more important than the need to insure our lives is the need to insure our ability to work. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>There are a few ways in which business owners might consider covering off a Disability:</span></p>
<p class="MsoPlainText"><span> </span></p>
<h2><span>Buy-Sell Agreement Funding</span></h2>
<h3><strong><span>Disability Insurance</span></strong></h3>
<p class="MsoPlainText"><span>Bob, Joe, and Dave run a successful widget business together as partners. As such, they have done their due diligence in putting together a buy-sell agreement (also known as a shareholder's agreement) in order to protect both their respective shares of the business as well as the company as a whole. </span></p>
<p class="MsoPlainText"><span>One of the clauses of the agreement surrounds disability. See, if Joe becomes disabled such that he can't do his job (which happens), then Bob and Dave have to pick up the slack. Joe might have his own <a target="_blank" href="/disability-insurance-payments-and-pitfalls">personal DI policy</a> which protects his salaried income. (However if he is paid with bonuses and dividends, he won't even qualify for a personal DI policy - that's another can of worms entirely). Either way, for a few years Bob &amp; Dave can probably keep the company above water for the time that Joe needs to recuperate. </span></p>
<p class="MsoPlainText"><span>But if Joe's disability is long term or &quot;permanent&quot; in nature, the company has a whole new set of issues on its hands. Joe is no longer contributing to the success, growth, and maintenance of the company due to his disability. Should he rightfully continue to remain an owner, reaping the benefits of a business that is growing independent of his own efforts? Or is it time for Joe's share to be bought out so Bob &amp; Dave can move on with the business, or take on another partner? (Again, Joe should have a personal DI policy, so it's not like he is being left in the dust if he's planned properly for himself). </span></p>
<p class="MsoPlainText"><span>Assuming the three of them agree, standard buy-sell agreements usually state that after a partner is disabled for &quot;x&quot; amount of time (usually a year), and/or if it is determined that the disability is permanent in nature, the disabled person's shares are to be purchased by the other owners or sold back to the company. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>Most companies and business owners don't have the money kicking around to pay for such things, especially as the company grows and prospers over time and the amount required to buy out an owner becomes substantial. There is however a solution: to fund the agreement with a special type of <strong>Buy-Sell Disability Insurance</strong>. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>The premise of Buy-Sell DI is to comply directly with the terms of the buy-sell agreement. <em>In fact, the insurance company may require a copy of the agreement to process the application</em>. </span></p>
<p class="MsoPlainText"><span>One of the easiest ways to implement this arrangement is to have <strong>cross-owned policies</strong>. Bob &amp; Dave personally own a policy for Joe. Joe &amp; Dave own for Bob, and Bob &amp; Joe own one for Dave. It works best for partnerships of only two or three owners; more than three partners, and the cross-ownership strategy gets a little too complicated.</span></p>
<p class="MsoPlainText"><span>Once Joe has been disabled for 1 year (for example), the agreement states that his share of the business is to be bought out either in a lump sum or over a period of 2 years. The DI policy is structured to pay Bob &amp; Dave exactly the money required to satisfy the terms of this agreement to the letter. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>You can also structure this policy so the company owns it and is the beneficiary of the cash to pay out Joe, however taxation issues become a little more prevalent in this case (depending on the corporate structure).</span></p>
<p class="MsoPlainText">&nbsp;</p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>Critical Illness</span></strong></h3>
<p class="MsoPlainText"><span>Critical Illness insurance (you can get the basics about it <a target="_blank" href="/critical-illness-insurance-for-wise-bloggers">here</a>) is another way to comply with the terms of a buy-sell agreement. CI usually pays out a lump sum of money in the event of a diagnosis of a critical illness. Since most buy-sell agreements stipulate a lump sum purchase of the disabled person's share of the business, this might be a good solution. It also usually costs less than corresponding DI policies, so is great for the budget-minded business owner. </span></p>
<p class="MsoPlainText"><span>Another benefit is that qualifying for CI has nothing to do with income history; whereas buy-sell DI requires the business to have a proven financial track record before the insurance company will issue the policy. So a business in the early stages may find that CI is the only way to insure buy-sell agreements. </span></p>
<p class="MsoPlainText"><span>However Buy-Sell CI has a significant downfall in comparison to it's DI counterpart: it only pays out on the diagnosis of a specific set of illnesses and injuries. If the buy-sell agreement is broader in scope to cover off any disability for any reason (which would make sense), then there may be cases in which the buy-sell agreement kicks into effect, but the insurance policy doesn't pay out the money to grease the transaction.</span></p>
<p class="MsoPlainText">&nbsp;</p>
<p class="MsoPlainText">&nbsp;</p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>In both cases, there are a number of snares and pitfalls that can be avoided with proper legal, tax, and financial planning. It is imperative that consultations with your team of financial professionals (lawyer, accountant, financial planner) should be arranged to make sure the agreements and corresponding policies are drafted to suit everybody's best interest. </span></p>
<p class="MsoPlainText"><span> </span></p>
<br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/business-succession-planning-part-3-using-disability-insurance-to-protect-your-business-interest">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1">
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</div> </div><br/></br>EntrepreneurshipInsurancebusiness successionbuy-sell agreementcritical illness insurancedisabilty insuranceshareholder's agreementFri, 15 Feb 2008 01:30:23 +0000Nora Dunn1801 at http://www.wisebread.comBusiness Succession Planning Part 1: What a Shareholder's Agreement Means to Youhttp://www.wisebread.com/business-succession-planning-part-1-what-a-shareholders-agreement-means-to-you
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<p class="MsoPlainText"><span>There are way too many business owners out there who assume that their business will provide for them in retirement, without actually considering how the business should succeed them. </span></p>
<p class="MsoPlainText"><span>And more business owners yet who are part of partnerships with other owners who all start as friends or family members with the best of intentions, but don&#39;t stop to consider and prepare for the inevitable - be it the death or disability of an owner, a marriage breakdown, or a falling out between co-owners. </span></p>
<p class="MsoPlainText"><span>Without properly giving these scenarios due consideration and preparing for them diligently, disaster can prevail. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>A Shareholder&#39;s Agreement is one such way to cover off the bases and provide a road map for the tricky world of life&#39;s twists and turns. </span></p>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span>A <strong>Shareholder&#39;s Agreement</strong> is also known as a <strong>Buy-Sell Agreement</strong>, or <strong>Business Will</strong>. Although there is reference to shares in both the title and many of the clauses, similar agreements are drafted for non-corporate partnerships and will cover many of the same issues. </span></p>
<p class="MsoPlainText"><span> </span></p>
<h2><span>What&#39;s Covered in a Shareholder&#39;s Agreement</span></h2>
<p class="MsoPlainText"><span>A Shareholder&#39;s Agreement will dictate exactly what happens when:</span></p>
<ul>
<li><span>A partner wants to sell their share</span></li>
<li><span>A partner becomes disabled</span></li>
<li><span>A partner dies</span></li>
</ul>
<p class="MsoPlainText"><span>…among other life circumstances that may affect the business, which we will discuss below.</span></p>
<p class="MsoPlainText"><span> </span></p>
<h2><span>Advantages of a Shareholder&#39;s Agreement</span></h2>
<ul>
<li><span>Preserves value of the business</span></li>
<li><span>Satisfies the needs of surviving owners</span></li>
<li><span>Minimizes tax implications</span></li>
<li><span>Maintains harmony between surviving family members and business partners (in the event of a death or disability)</span></li>
</ul>
<p class="MsoPlainText"><span> </span></p>
<p class="MsoPlainText"><span> <br /></span></p>
<h2><span>Clauses to Include</span></h2>
<p class="MsoPlainText"><span>Following are a number of clauses that business owners may want to consider putting into their Shareholder&#39;s Agreement:</span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>1) Restrictions</span></strong></h3>
<p><span>This clause will dictate the restrictions on each owner&#39;s ability to sell, give, or bequeath their share of the business to anybody outside of the group of owners without prior permission or approval. </span><br /><span>Obviously this is important, in order to maintain the synergy and efficiency flow of the business&#39;s operations. </span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>2) Valuation</span></strong></h3>
<p class="MsoPlainText"><span>How will the company be valued in the event of a sale (either of the business entirely or of an owner&#39;s share thereof)? Will you have a professional valuation? Or use the adjusted book value, or capitalized earnings, or a combination?</span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>3) Funding Clause</span></strong></h3>
<p class="MsoPlainText"><span>This details how the owners can buy the shares of a disabled or deceased owner through the use of specific insurance policies. (These will be addressed below and in future articles in this series). </span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>4) Payment Clause</span></strong></h3>
<p class="MsoPlainText"><span>This specifies exactly how payment can be made when buying another owner&#39;s share. Options include a lump sum, instalments, as well as the interest charges on unpaid balances.</span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>5) First Right of Refusal</span></strong></h3>
<p class="MsoPlainText"><span>First Right of Refusal allows a co-owner who wants to sell their share of the business to do so, but they must first offer their share to the other co-owners. If they refuse to buy, the selling co-owner has the right to sell to a third party at the same price they offered to the co-owners or higher (but not lower). </span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>6) Shot-Gun Clause</span></strong></h3>
<p class="MsoPlainText"><span><em>&quot;You buy me out right now, or else I&#39;m going to buy you out&quot;!</em> </span></p>
<p class="MsoPlainText"><span>With this clause, an owner would approach the other owners and offer to sell their share of the business for <em>&quot;x&quot;</em> dollars. If the other owner(s) refuse to buy, then their share of the business will be bought for that price. It is often used in the event of a falling out of the owners, as it culminates in one of the partners being bought out. </span></p>
<p class="MsoPlainText"><span>This gets sticky if one of the owners is in financial trouble and the other owner knows about it and exploits it. They can offer to sell their share under the shot-gun clause, knowing that the owner in financial trouble doesn&#39;t have the ability to pay up. Then, the sneaky one has the right to buy out the other owner. And unless this clause is worded correctly, the price could be well under the fair market value, but the owner in financial duress would have no choice but to sell at that price if they can&#39;t buy out the other owner at the same price. </span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>7) Disability</span></strong></h3>
<p class="MsoPlainText"><span>If one of the owners becomes permanently disabled (or disabled long term without an end in sight), such that they can&#39;t perform their tasks as part-owner, it is often best that their share is bought out. Issues to address in this section of the agreement include:</span></p>
<ul>
<li><span><span> </span>How the buyout is funded (since the individual owners or company books probably don&#39;t have the cash hanging around to do this - there are insurance policies for this sort of transaction)</span></li>
<li><span><span> </span>Terms of the disability which will trigger the buyout. For example, how long must the disability continue before the buyout process begins, and exactly what are the criteria the disability (and its effect on the business). </span></li>
</ul>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>8) Death</span></strong></h3>
<p class="MsoPlainText"><span>Similar to disability, how is the deceased owner&#39;s share dealt with? Usually life insurance on the life of each business owner is used to fund the buyout, but even then there are different ways to structure the policy. </span></p>
<p class="MsoPlainText"><span>It can also be written into the buy-sell agreement that the deceased&#39;s shares are to be bequeathed to a spouse or child until their own death, at which time the shares are sold to the remaining owners or redeemed back to the company itself. </span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>9) Retirement</span></strong></h3>
<p class="MsoPlainText"><span>So many business owners assume that their business will somehow take care of them in their retirement years, not knowing exactly how. Salaries and bonuses are often the main form of income (rather than share dividends), so when the salary stops as the active work does, what will provide for retirement income? Will there be money in the company to buy out the retiree&#39;s share? Proper structure and funding around retirement is an essential part of the buy-sell agreement and business succession plan. </span></p>
<p class="MsoPlainText"><span> </span></p>
<h3><strong><span>10) Marriage Breakdown</span></strong></h3>
<p class="MsoPlainText"><span>If one of the owners gets divorced, that owner&#39;s shares may be subject to a division of property along with everything else that gets split. This can obviously wreak havoc with a business, if a divorced spouse suddenly becomes part owner of a business they had no previous involvement in when the marriage was on solid ground.</span></p>
<p class="MsoPlainText"><span> </span></p>
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<p class="MsoPlainText"><span>As with any legal agreement, thorough discussion is a pre-requisite to a trip to the lawyer&#39;s office. The topics covered off above are rarely ones that just &quot;come up&quot; over drinks after work, so a special and concerted effort must be made to ensure the business will continue to run smoothly and successfully in the event that life throws us those inevitable curve balls. </span></p>
<br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/business-succession-planning-part-1-what-a-shareholders-agreement-means-to-you">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1">
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</div> </div><br/></br>Entrepreneurshipbusiness partnershipbusiness successionbusiness willbuy-sell agreementcorporate partnershipshareholder's agreementMon, 04 Feb 2008 01:46:18 +0000Nora Dunn1741 at http://www.wisebread.com